Pensions: Occupational Pensions

Debate between Lord McFall of Alcluith and Lord Shutt of Greetland

Wednesday 1st February 2012 Lords Chamber

[Lord McFall of Alcluith]

To ask Her Majesty’s Government what steps they are taking to reinvigorate occupational pensions.

[Lord Shutt of Greetland]

My Lords, before the debate is introduced, I hope I may make the normal point that it is a timed debate. Apart from the mover and the responder, other noble Lords are limited to six minutes. The monitor is dark now but when it shows six, the six minutes are up.

[Lord McFall of Alcluith]

My Lords, I am delighted to introduce this debate on occupational pensions. Last year I was asked by the National Association of Pension Funds to set up a working party looking at occupational pensions. When the report was published, I mentioned that a golden sunset of pensions was giving way to a bleak dawn. Many millions of people will face poverty in retirement—some absolute poverty. That is the inauspicious background to this debate. People are saving less and less and there is less and less trust in the pensions system. In fact, the NAPF confidence index is presently at minus six—the lowest it has ever been since its inception.

I want to look at the issue of risk. The flight from defined benefit to defined contribution schemes means that all the risk is on the saver. In effect, the saver is often left to navigate through a pensions minefield which would puzzle the brain of Albert Einstein. The consumer is short-changed and the voice of that consumer is missing. We need to ensure that that voice and that presence is centre stage in pension provision. In the flight from defined benefits to defined contributions, it strikes me that it is not just the risk which has shifted from the employer to the employee but that the onus is on the employee—the individual—to make critical decisions about their pension which they are ill equipped to do. It is a fiendishly complex matter and they need help and reassurance from scheme trustees who promote good governance. We need good, strong, independent governance. That is central to good member outcomes. We can achieve that good governance only if we have an environment which is conducive to achieving that, and if we have proper structures. We need schemes which are of a sufficient size to enable them to reap the benefits of scale and produce low charges to ensure that we get good governance and high-quality communication.

At present, there are 54,000 separate DC schemes operated by tiny employers in this country. With the average worker now changing job 11 times, we see the proliferation of these tiny pension pots with no portability. These have two critical disadvantages. First, they lack the scale efficiencies of larger ones and have inadequate governance, and, secondly, they tend to deliver worse outcomes at higher costs. There are no compensating benefits whatever.

The Pensions Minister, Steve Webb, has put out a challenge on red tape, as he calls it. That is a welcome opportunity to reinvigorate the pensions landscape, not just by eliminating regulation but by ensuring that we have better and more appropriate regulation. The environment for employers should be one whereby they offer decent workplace pensions with a minimum fuss, while ensuring that members’ benefits are protected. A key area for government consideration is over the risk-sharing between employer and employee. The Government need to ensure that employers who want to assume some risk are incentivised to do so. The questions that need consideration are: how should the Government support and reinvigorate multiemployer- wide schemes? In what ways can they fiscally encourage employers and reward them for taking on some of the risks?

The third aspect is auto-enrolment and NEST. This is welcome because it has the potential to encourage between 5 million and 9 million people to save for retirement in addition to those who have not saved previously—largely those on a low income. First, the Government have to look at the state offering and establish a firm foundation for saving. It will not be worth while for people to save if that firm foundation is not in place. Secondly, I have a simple message for the Government: remove the shackles from NEST. Take the messages that its chief executive Tim Jones and chairman Lawrence Churchill gave to the DWP Select Committee a few months ago. The cap and transfer-in rule are preventing the best outcome for institutional savers and government. The rule stops consolidation of existing pension provision for employers into NEST, and the cap ensures that employers have to run more than one scheme—one for the lower paid and another for higher earners—if they choose NEST.

Lawrence Churchill’s remarks to the committee were telling. He said that 40 per cent of the lower paid are engaged by large employers, so already 40 per cent of those whom he called “our market” will not use NEST because of the restrictions. By impeding the volume of business for longer, the Government’s loan will take longer to be repaid. It is therefore wise for the Government to remove that contribution cap. By doing so, NEST would need £100 million less in taxpayers’ money. It should be remembered that the shackles were imposed because of a 2005 political settlement. Removing the restrictions would ensure efficient organisation, and auto-enrolment would incentivise industry to lower costs and charges.

On the issue of costs and charges, disclosure is inconsistent among schemes and providers. In fact, what is consistent is the opacity of disclosure. We need transparency on the cash impact on pension pots. I welcome the code of conduct that NAPF has established as a result of my committee’s proposals. Let us keep in mind that a 2 per cent fee over the lifetime of a pension, which is not out of line, swallows up 50 per cent of an individual’s pension pot. My message to the Government is: do not wait and see the impact on high charges; use regulatory powers to apply stakeholder charge-capped schemes that are eligible for auto-enrolment.

The UK has the largest annuities market globally—450,000 were purchased in 2009 with a total value of £11 billion, and that will increase in the years ahead. Research since 1957 indicates that for each year of life expectancy, annuity rates have fallen by 0.56 percentage points. What does that translate into? An individual with a £100,000 pension pot in 1957 could have secured a pension of £11,000. In 2009, a similar pot could have secured a pension of £6,200 and, in 2010, £5,200. As the Minister knows, the rates offered can also vary by more than 25 per cent for a similar individual and annuity type. Shopping around should therefore be the default position, and there is a long way to go in that area. The reason that it should be the default position is that it would allow more flexibility for the changing spending patterns in old age.

The issue of Europe has been brought to me through lobbying. Lobbying by companies is very relevant because of the negotiations on Solvency II. The Government have to be vigilant here because if we do not get the right outcome, we will see the death of defined benefit schemes in the United Kingdom.

Lastly, on stability, the pensions cycle is between 40 and 50 years. The political cycle is between four and five years. We are out of sync. Since 1996, there have been more than 800 changes to pensions legislation and regulation—the equivalent of one change per week. I say to the Minister that that does not add stability. What we need to do is think about taking the politics out of pensions. A standing advisory body on, say, longevity and state pension ages, would be a good start, but we need a pension policy that is stable, for the long term and based on political consensus. I therefore suggested in our report, and suggest again to the Minister, that an independent standing commission on pensions should be established to ensure that the interests of the saver are centre-stage for the long term. If we work together in harmony on these proposals, perhaps we can assist in averting a bleak dawn for pensioners in the future.